REAL ESTATE INVESTMENT INDUSTRY UPDATE – APRIL 2016
In this month’s real estate industry investment update we look at what is driving first home buyers towards investment, summarise new swimming pool laws, discuss self-managed super funds and consider whether we are taking a balanced view of our financial risk.
NATHAN’S UPDATE: SHOULD YOU BUY YOUR OWN HOME OR INVEST IN PROPERTY?
The desire to buy a house is pretty strong for many Australians as most of us feel a deep need to have a roof over our heads and a little nook in this world that’s just for us.
For generations the Australian dream was that of owning a quarter acre block in the suburbs with a modest family home perched on top. It’s something most of us have experienced firsthand by growing up in our parent’s homes and intrinsically wanted this for ourselves one day. However, if we were to follow in their footsteps today we would need to fork out $1 million to buy the same 3 bedroom home which is still over 20km from the CBD! With figures like that it starts to look a lot less modest and more like a luxury. It’s no wonder that a recent survey by MLC reports 58% of people believe the next generation will never own their own home. So many are feeling disheartened and either giving up entirely on property ownership or settling on something they may not love but at least can afford. This is a compromise they shouldn’t need to make which is why I have made it my personal mission to help people build wealth through property investment so that they can live the life they want, where they want.
For me personally I rented for a long time before I finally purchased my own home, however that doesn’t mean I avoided property altogether. I just made sure that my money worked harder for me and not the other way around. With a little bit of delayed gratification I was able to finally buy my dream home. Here’s a little video I dug up where I go into more detail on buying your own home vs an investment property first.
FINANCE UPDATE: CHANGING REAL ESTATE LANDSCAPE IS PRODUCING “RENTVESTORS”
With property prices in Sydney having grown so high and fast in recent years many aspiring first home buyers have been left feeling daunted by the prospect of a huge home loan or have simply resigned themselves to the idea that they missed the property boat. Recent research by LJ Hooker shows that the national average loan for a first-time buyer was $326,000 in March 2015; a growth of 14% over the past 5 years and 58% since 2005. While times may seem tough it is important to remember that opportunities can always be found, you may just need to think outside the box.
Tim Wong from Zinger Finance has seen a rise in the number of rentvestors looking to secure finance for their first property purchase. These are usually younger individuals or couples who wanted to get a foothold in the property market and decided that property investment was an alternate path to eventual home ownership. Once again LJ Hooker identified that this was one of the key trends for under 30’s in the property market.
Although Tim acknowledges that investors get treated more harshly by the banks as “It’s more likely first home buyers can borrow with a smaller deposit at higher loan to value ratio’s for a principal place of residence than for an investment” many are now resisting the urge to buy a home emotionally or on impulse in order to avoid being saddled with a large mortgage and a long repayment term. Instead, they are reasoning that they can get someone else to pay their property loans and maybe even their mortgage for them if they strategically invest in properties. This is a strategy which has already paid dividends for many of Zinger Finance’s clients, enabling them to purchase a home they can not only afford but also love living in.
PROPERTY MANAGEMENT UPDATE: MORE PEOPLE ARE RENTING THAN EVER BEFORE
There is a trend of more and more Australians becoming dependant on rental properties as personal home ownership is on the decline across Australia, especially for the younger generations. According to a report by the Australian Institute of Health and Welfare the number of households who owned their own home dropped from 42% in 1994-95 to 31% in 2011-12 . One-quarter of all households were renting from a private landlord in 2011-12, up from 18% in 1994-95. Of people in the 25-34 year age bracket, 51% were renting from a private landlord in 2011-12.
While home ownership does still hold a traditional appeal to stability and family values, it seems to be overshadowed by the more modern value of flexibility. For Scott Johnson of Blink Property Management this is good news as there is currently an abundant supply of tenants to match with properties.
FINANCIAL PLANNING UPDATE: ARE YOU BEING REALISTIC OR OPTIMISTIC ABOUT YOUR FINANCIAL RISK?
The frontiers of scientific psychology are unveiling how humans have a built-in optimism bias, making them think more positively about the future. It is theorised that this inbuilt bias is the result of an evolutionary necessity, surely feeling optimistic about the day ahead surely would have an advantage when facing the daily challenges of prehistoric life. Without this optimism they could have easily given into despair and lost the motivation to do even the most menial of tasks.
So what does this mean for us today? Put simply, most of us still look at our long-term prospects in life through rose coloured glasses. Many of us underestimate our likelihood to suffer from injury, death, trauma and the associated loss of income for ourselves and our families.
A recent report published by The Risk Store showed that on average $20 million dollars was paid each day in 2014 to Australians who claimed on their health and income-related insurance policies. When combined this came to a whopping $4.9 billion dollars.
That’s a lot of people who didn’t ever want to claim – but had to. On average the claims amounted to $66,057 per person. If it were not for insurance where do you think they would have gotten that sort of money, in what was no doubt one of the lowest points in their life? Would they have had to of sell off their hard earned assets??? Would they have become financially destitute? How would you feel if something like this were to happen to you or your family?
It’s important to retain an optimistic mindset, in fact it’s one of the key characteristics of talented successful people according to cognitive neuroscientist Tali Sharot (she has an amazing TED Talk on this) however it is equally important to take a pragmatic view of risk and make sure you are adequately protected.
LEGAL UPDATE: NEW LAWS FOR PROPERTIES WITH SWIMMING POOLS
This month Steven Sidorovski from Zenith Legal shares the latest legislative update, this time concerning NSW properties with swimming pools. As of 29 April 2016 all properties containing a swimming pool (including spa pool) will require a valid certificate of compliance or relevant occupation certificate before being sold or leased. The buyer will have 90 days from the date of settlement to rectify defects listed in the certificate of non-compliance and obtain a certificate of compliance. These requirements do not apply to lots within a strata scheme or off the plan contract.
Certificates can be obtained from the local council or an independent accredited auditor which is listed at www.swimmingpoolregister.nsw.gov.au. Anecdotal industry evidence suggests that 95% of pools fail at the first inspection, and it can take up to 90 days before a pool becomes compliant thereafter so it would be wise to address the issue during or straight after settlement. If you want to know whether a pool is compliant you can check its status at www.swimmingpoolregister.nsw.gov.au.
ACCOUNTING UPDATE: SELF MANAGED SUPERFUNDS AND TRUSTS
SMSFS – FLEXIBILITY AFTER BORROWING RULES
The world of Self-Managed Super Funds (SMSFs) is evolving dynamically and changing rapidly, the size of the SMSF market and the rate at which new funds are forming is staggering. The flexibility and options available to SMSFs is a key driver in why the SMSF sector has continued to perform in the face of the global financial crisis.
Ridhwan Hannan from OnePath Accounting says “I receive calls every week from clients asking about facts and myths about SMSFs, some questions are scary and some are entirely well thought out – what is clear amongst the barrage of questions and answers is that people are very attracted to the flexibility which SMFSs offer. Gone are the days of the three investment options offered by the retail super providers – SMSFs can provide members ways to invest which may help their children or help widowed spouses in the future”.
Self-managed super funds (SMSFs) can use the borrowed monies to purchase a single asset. The SMSF rules around borrowing are changing and they are changing rapidly.
Ridhwan says “It is important for your accountant to know what life may be like after a change to the borrowing rules for SMSF – here we discuss the alternative to borrowing”.
NON GEARED UNIT TRUSTS
Non-geared Unit Trusts are an increasingly popular way to co-invest with your SMSF to purchase property or shares. The non-geared unit trust allows for a range of short term and long term financial and taxation benefits for both the SMSF and the individual member when purchasing an asset. Non-geared unit trusts offer advantages on cost, compliance and purchasing power when considering assets such as property – residential or commercial. Members can co-invest with their SMSFs into a unit trust, depositing money into the Unit Trust bank account which uses the available funds to purchase a property or other allowable asset.
The unit trust is owned by the SMSF and member in proportion to the asset value. The SMSF receives its portion of the income from the asset which is taxed at the 15% rate and the member receives his or her share of the income which is taxed at their marginal rate. This investment strategy can help people who need more disposable income, who wish to use the strategy as a negative gearing tool or simply want to enter the property market and utilise the capital available in the SMSF. The SMSF can continue to purchase units from the member and over time purchase the entire unit trust so that it is held entirely within the SMSF, allowing the member a flexible and staged approach to sell the units to the SMSF, members can salary sacrifice or use their super guarantee payments to purchase units from themselves. This method presents a cost effective and flexible way in which to invest into property. Members can claim interest deductions for their portion of the investment in their personal name and provide some tax relief and further they can control the rate at which they sell the units in the unit trust off to the SMSF. The non-geared unit trust provides an alternative to the traditional instalment warrant structure to those seeking greater tax minimisation and flexibility in their SMSF investing strategy.
While trusts can be an attractive option for numerous reasons it is important to weigh up their benefits in the context of what you want to achieve through your investment strategy. SMSF’s can significantly impact the way in which your portfolio takes shape and grows. An experienced property accountant can help you make sense of the many choices available to you and advise you on what is strategically most suitable to your situation and goals.